Economists: Fed Policy on Right Course, Deflation a Short-Term Risk

Most economists in a recent survey said they approved of the Federal Reserve's current course on monetary policy and see deflation as a risk for the short term.

The National Association for Business Economics said on Monday that 60 percent of 242 members surveyed from July 30-Aug 10 said monetary policy was "appropriate" for the conditions the economy currently faces.

The Fed kept benchmark overnight interest rates steady in a zero to 0.25 percentage point range at its last policy meeting on August 10 and renewed a pledge to keep them low for an extended period.

Some 67 percent felt the Fed's decision at the August 10 meeting to use cash from maturing mortgage bonds it holds to buy more government debt was helpful in the face of a weakening economy. That move keeps the Fed's balance sheet from running down,

In the near term, 45 percent of respondents believed monetary policy risks now were tilted toward deflation, or falling prices, in the short run but toward inflation in the longer term.

The Fed has sought to keep ample liquidity in the financial system in a bid to spur lending, but some analysts say it may be difficult to remove that liquidity quickly enough in the future to ward off the risk of an inflationary price spiral.

"Roughly half feel the Fed will start tightening too late, and a similar share think the recently passed financial regulation bill will modestly reduce the risk of another global financial crisis," the survey said.

There seemed to be considerable skepticism among the economists on other matters.

Fully 89 percent thought the recently passed sweeping overhaul of the financial regulatory system would have only modest effect in avoiding another crisis, and only 3 percent said it would significantly cut future risk.

The economists generally opposed letting tax cuts put in place in 2003 by the former Bush administration expire on schedule at year-end and doubted that a group established to find ways to shrink deficits will produce anything of value.

"A resounding 81 percent think the bipartisan National Commission on Fiscal Responsibility and Reform will be unable to produce a credible plan capable of garnering congressional support," the survey found.

The commission is to identify policies that would be effective in shrinking the huge shortfall between the government's income and its spending and to produce a report with recommendations by December 1.

Most economists in a recent survey said they approved of the Federal Reserve's current course on monetary policy and see deflation as a risk for the short term.
The National Association for Business Economics said on Monday that 60 percent of 242 members surveyed from July...